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Nokia: A Blow to the Head; a Blow to the Gut

While Nokia(NYSE: NOK) was taking a jab to the chin with the recent embarrassing and expensive software "glitch" in its flagship Microsoft(Nasdaq: MSFT) Windows Phone-powered smartphone, the Lumia 900, the real damage to its bottom line has been to its core cell-phone business. That would be the cheap feature phones that have been Nokia's bread and butter.

The battle for Nokia's survival has lately been seen as a fight to wrest away smartphone market share from Apple's (Nasdaq: AAPL) iPhone and the various smartphones made by Samsung, LG, and all the others that run Google's (Nasdaq: GOOG) Android operating system. But the cheapo dumb phones that are almost ubiquitous in the emerging markets of the world have been taken as conventional wisdom to be the province of Nokia alone. Indeed, The Economist has called the Nokia brand as recognizable as Coca-Cola and, somewhat morbidly, has labeled the $30 Nokia 1100 cell phone as the "Kalashnikov of communication for the poor."

The dying feature phoneBut the cause for Nokia's warning this week that its mobile handset unit would post first-quarter operating margins of negative 3%, and which sent the company's shares tumbling to a 15-year low, came from its traditional strongholds: not only Africa, but India, China, and the Middle East. The ubiquitous feature phones that could only call and text are being replaced by low-priced smartphones running the Android OS. Those phones are being manufactured by companies such as Chinese firm Huawei. And Nokia just doesn't have a smartphone yet that can compete against prices as low as $150 for an Android phone in China.

Sneak attack?Nokia CEO Stephen Elop expressed surprise at the speed at which low-end smartphones were able to encroach on the feature-phone market. In a call to media and analysts on Wednesday, he said, "The rate at which this is happening is beyond what we expected." However, he added, "We're accelerating the rate we can push Windows Phone devices downmarket."

Nokia may be fighting on two fronts, but it hasn't been knocked out yet.

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